Chapter

Chapter Chapter <b>Market Innovations to Better Allocate Generational Risk</b>

Salvador Valdés‐Prieto

in Restructuring Retirement Risks

Published in print August 2006 | ISBN: 9780199204656
Published online September 2006 | e-ISBN: 9780191603822 | DOI: http://dx.doi.org/10.1093/0199204659.003.0012
Chapter  Chapter   Market Innovations to Better Allocate Generational Risk

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Mandatory old-age benefit programs tend to require periodic adjustments as a result of demographic and economic shocks. However, such discretionary adjustments create political risk for workers and beneficiaries, and raises taxpayer risk. An alternative way to handle such shocks is to use rule-based adjustment, which can be adopted in an unfunded system without incurring transition costs and without increasing public debt. This chapter explores an approach to this problem that would endow the Social Security Trust Fund with property rights over the revenue of a (much reduced) residual payroll tax paid by future workers. This revenue would be securitized and the resulting securities priced in financial markets. The new securities created in the process would allow beneficiaries to obtain safe real pensions protected from investment risk.

Keywords: Social Security Trust Fund; securitization; taxes; revenue stream; benefit stream

Chapter.  7410 words. 

Subjects: Financial Markets

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